Could the pound euro exchange slide to 1.18 again? Latest GBP/EUR forecast

We consider the latest long term technical forecast for the pound euro exchange rate, issued by the Research Desk at Afex.

The pound sterling continues to hold up well on the global FX markets with the first day of a new week seeing recent levels maintained.

A look at the pound exchange rate complex shows:

With no important eco data on the calendar on the calendar in the UK, trading in the major sterling cross rates was mostly order driven and technical in nature.

"The news flow from Europe or the US was only of second tier importance. Sterling traded nervous around the open of the European markets. However, the opening losses were reversed very soon. Cable returned to the mid 1.66 area; EUR/GBP to the mid 0.8250 area," says Piet Lammens at KBC Markets.

The better than expected German IFO and the upward revision of the EMU January CPI are hardly visible on the EUR/GBP charts.

Later in the session, the dollar found a better bid overall. EUR/USD and cable lost some ground, with cable lightly outperforming.

Forecast for the pound euro exchange rate

Turning to the outlook, we note that there are some key support levels that must be observed for the bullish bias to GBP/EUR to continue to play out.

Analysts at the Research Desk at currency brokerage Afex note that should key support levels fail then we could be in danger of seeing a dramatic slide to 1.18:

"Having briefly scored another new cyclical peak Sterling prices are selling off again as yet another reaction unfolds.

"This complicated (yet still gradually rising) series is likely to extend further over coming weeks unless the market drops beneath secondary support at 1.1975 in the meantime. However at some point GBP values must either accelerate upward or else risk a more substantial and long-lasting top forming.

"An obvious opportunity to resume prior (pre-2009) macro bearishness was already spurned twice in 2013 and to re-instate this negative scenario indicators suggest an extension through key 1.1800 support would probably be required as well."

Euro exchange rates firm on German Ifo data

The euro initially firmed on news that German’s closely watched Ifo survey of business confidence rose to 111.3 in February, well above the forecast for 110.6.

Strong German economic reports of late have helped support the euro but have also contrasted other disappointing economic reports from other parts of the 18-member bloc, namely France.

Separately, the final reading of euro zone CPI for January came in at 0.8%(y/y), just above the 0.7%(y/y) initially reported. The slight uptick in CPI did little to alleviate worries about disinflation or maybe even deflation in the euro zone.

Investors will focus on Friday’s flash, or initially reading of February CPI for the euro zone, which is forecast to show prices once again falling to 0.7%(y/y). The longer CPI stays at these depressed levels, the higher the likelihood of further ECB monetary easing, a very negative scenario for the euro.